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Newsletter - July 22nd, 2023

Updated: Aug 29, 2023

Dear Reader,


Attached is our latest list of stocks generated from basic value screens (low p/e, ev/ebitda, debt/equity, etc.), which don’t meet our investment criteria - and our reasoning.


This may help you avoid a few ‘value traps’ or stocks that aren’t sufficiently attractive compared to the opportunities available today.


For reports of stock ideas that pass our quantitative and qualitative standards, join at the link below:



 

Rare Seth Klarman Interview

 

Seth Klarman interview by Ted Seides


Seth Klarman was recently promoting Security Analysis 7th Edition, which includes his preface. Some notes on his interview below:



6:15 Secret


Klarman explains his start in value investing as being let in on a "secret" - "when you see individual companies trade at a discount from what they're obviously worth ... there's inefficiency here, and you have the chance to add value and do well."



7:45 Railroad bankruptcies


His mentor Max Heine was then bidding for Penn Central bankrupt bonds, which had building rights over the tracks, and real estate value in addition to the railroads.



8:45 Inefficiencies


Klarman describes a takeover offer where he received cash plus shares of a subsidiary at under 1x earnings - a glaring arbitrage opportunity you wouldn't find with conventional research.



12:00 Academics


Think like a business owner.



16:45 Groupthink


When considering allocating capital to fund managers in the early 80s, Klarman was put off by the herd mentality in popular stocks at the time and the lack of personal investment in the funds they managed.


The stock ideas we report are certainly not popular, undervalued, and we have our net worth invested in them.



20:15 Book value


Klarman says he was too enamored of book value - but he didn't do too badly with this approach.



22:45 Don't look to Mr. Market for feedback


If you're looking to exploit Mr. Market, you must be sure about the value of your investments - you can't doubt yourself when prices decline, which is why you must be certain of investment values when you get in.


We try to buy stocks that are undervalued by objective standards to provide a solid foundation to weather market turmoil.



27:45 AI vs. Human judgment


AI may be good at past pattern recognition but may not be as good in "oddball" transactions where practical judgment is required.



30:30 Supply/Demand imbalances


Worthwhile to think in terms of natural oversupply/lack of demand when seeking inefficient areas of the securities market.



33:30 Right about less


The larger the discount from value, the less you need to be right about the future of the business.


Our focus is on the margin of safety to lessen reliance on future prospects for investment success.



39:45 Low multiples


Lower price multiples of fundamental factors lead to higher and safer returns than the converse.



48:15 Averaging down


Klarman earned his largest profits from averaging down his stocks - food for thought.



50:45 First protect capital


First look at investment downside, then look at profit potential.


We strive to present stocks that have limited downside, and very little risk on a group basis.



56:30 China


Interesting to note Klarman invested in Chinese stocks earlier this year when geopolitical fears were high.


He has no views on emerging/frontier markets, "but if a stock is trading at 25 cents on the $, those things tend to work out".



1:08:00 Long-term orientation


This is essential to fruitful investment results.



1:29:45 Don't stop pulling threads


Michael Price taught Klarman to keep pulling threads on interesting ideas e.g., if a stock is cheap, look at the listed holding company, fellow subsidiaries, peers in the industry, etc.


 

Until next time, Cheers!




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